Opinion: Could it be that Bernie Sanders is the real-deal capitalist?

The genius of his plan is productivity, which could unleash much faster economic growth

Reuters

Sen. Bernie Sanders wants to drive down unemployment, which would force businesses to invest.

By

TimMullaney

Writer

As socialist as Bernie Sanders is, the most inadvertently funny thing about his economic plan is that it depends — naively, innocently or maybe even cannily — on unleashing the animal spirits of America’s job creators.

Go figure.

Inspired by the fuss over a raft of economic advisers to Barack Obama and Bill Clinton deriding the analysis behind Sanders’ plan as, to paraphrase Obama lieutenant Austan Goolsbee, puppies with Lotto tickets attached to their collars, I set out to read the whole 53 pages produced by University of Massachusetts economist Gerald Friedman. It is a thing of beauty, promising growth rates of 5.3% a year, which have not been sustained since pre-Depression days at least.

But amid the promises of 50% gains by 2026 in real median household incomes that have been mostly flat for 40 years, and all the talk about whether more spending on the middle class and nearly doubling the minimum wage will help more than taxing and regulating the rich will hurt, the footnotes give away how Friedman says it will actually work. Sanders will double productivity growth, which has slumped since the Web-bubble investment surge, by essentially counting on full employment to force businesses to invest.

Wow.

The basic way to get a virtuous cycle cranking is to let productivity growth deflate the inflation-causing tendencies of wage increases by trimming the quantity of labor in each unit of output. It’s Economics 101.

From every previous discussion of private business, Sen. Sanders himself believes moves toward productivity enhancement or innovation are so much cover for greed. Drug companies, banks, private hospitals, companies that buy back stock — pretty much everybody — has come in for this stock answer from a politician as intellectually pre-programmed as Marco Rubio’s debate shtick.

But Friedman’s analysis of Sanders’ plan has a particular take on how productivity happens: Businesses will invest more, breaking a 15-year cycle of underinvestment and productivity stagnation since the Internet bust, only when unemployment is so low they have no choice. That happened in the 1960s and will happen again, he says.

“There is a strong positive correlation between productivity growth and levels of unemployment and rates of GDP growth,” Friedman writes. “Higher GDP growth explains all of the higher productivity growth projected here.”

As painful as it is to admit, that’s not totally crazy. In fact, it resembles an argument I’ve made myself in a different context. (I wasn’t talking about a wholesale restructuring of taxation, regulation and spending to tighten labor markets, but arguing that investment would let business offset labor shortages caused by Baby Boomer retirements.) The basic way to get a virtuous cycle cranking is to let productivity growth deflate the inflation-causing tendencies of wage increases by trimming the quantity of labor in each unit of output. It’s Economics 101.

But for a 74-year old Jewish guy from Brooklyn, the motivation techniques Sanders would apply sound an awful lot like Sister Mary Margaret Explaining It All for You. With an extra rap across the knuckles for having foreign profits.

The real problem — and no one knows how serious it would be — isn’t Sanders’ tone. It’s whether entrepreneurs or professional managers would set a higher bar for investment decisions if they pay appreciably more of the rewards as taxes, or even believe that Sanders’ plan will move demand. “Bernie’s economists have created a plausible theory that assumes higher worker pay and productivity overcome rising costs and the negative impact on CEO decisions,” says Joel Naroff, president of Naroff Economic Advisors. “It would only reduce growth if it [ticks] off CEOs, who refuse to expand. Not an improbable outcome.”

Negative rates spur sales of safes in Japan

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Normally skeptical folks should ask themselves whether government can successfully orchestrate a near-constant state of tension at full employment, between consciously imposing cost and profit pressures on businesses and convincing them to add risk in industries that Sanders shows no comprehension of. In fact, 21 of Friedman’s 22 mentions of “investment” refer to public spending.

That’s the kind that matters, right?

In the 1960s, when policies much like Sanders’ produced growth nearly as strong as Friedman promises, the end was a long cycle of inflation, stagflation and worse, which produced the Reagan administration and a watered-down version of a GOP-led realignment. And that was when U.S. businesses didn’t compete with, or use, low-wage emerging-nation labor. There are reasons Democratic proposals are more disciplined now.

Happily, the long post-2008 slog of economic policy is finally bearing fruit. Median household incomes have reached pre-recession levels after climbing an inflation-adjusted 9.4% since 2011, and wages are now rising about twice as fast as inflation. That means a virtuous cycle of wage growth and reinvestment may be kicking in already, without quite so ham-handed a captain at the economy’s till.

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